Lotte Duty Free to partially close down operations at Incheon International Airport

2018-02-14

By Lee Han-na and Lee Eun-joo

South Korea’s top duty-free operator Lotte Duty Free will partially pull its business out of the country’s main gateway Incheon International Airport due to a sharp fall in sales after the number of Chinese visitors to Korea nearly halved last year on China’s crackdown on group tours to Korea.

Lotte Duty Free announced on Tuesday that it has decided to return three of its four licenses - perfume and cosmetics (DF1), leather goods and fashion (DF5), and all categories (DF8) - at the first terminal of the airport. The travel retail arm of Korean conglomerate Lotte Group will maintain its core liquor and tobacco contract.

The stores under the three concessions will remain open for 120 more days after Incheon International Airport Corp. approves closure next month.

Lotte Duty Free fixed its rent rate based on an estimation of a possibly 50 percent or more annual sales growth expecting a steady growth in the number of Chinese travelers when it tendered for a bid to operate shops. The number of Chinese tourists to Korea, however, halved last year after Beijing banned group tours to Korea in protest against Seoul’s decision to host the U.S.-backed Terminal High Altitude Area Defense (THAAD) anti-missile system in March, delivering a significant blow in sales at its duty-free shops.

The government’s policy direction to grant additional duty free store licenses in Seoul has also intensified competition among local duty free operators, adding woes to the company that is already grappling with higher licensing fees, Lotte Duty Free said.

The retailer has logged about 200 billion won ($184 million) in losses from its business at the country’s main gateway over two years since 2016. Lotte Duty Free said it projects losses to amount to 1.4 trillion won in 2020 if it continues its operations until that year.

Lotte Duty Free has been operating duty free shops at Incheon International Airport since 2001. In the first phase from February 2001 to January 2008, it paid rent totaling 484.5 billion won, and in the second phase from February 2008 to August 2015 over 2 trillion won. Its rent fee for the third phase from September 2015 to August 2020 totals 4.1 trillion won.

Lotte Duty Free said it would do its utmost to minimize impact from the partial closure by allowing its directly-managed workers at the first terminal to work at the stores at the second terminal and other city stores in downtown Seoul. It also plans to consult with the new operator to keep its contract-based sales staff.

Its city tax-exempt store in Lotte World Tower in Seoul is also on the verge of losing its license after chairman of Lotte Group was put behind bars for bribery charges. On Tuesday, the Seoul Central District Court sentenced Lotte Group Chairman Shin Dong-bin to a two-and-a half-year jail term without probation and fined him 7 billion won for a bribery charge involving the corruption scandal that forced out Korea’s former President Park Geun-hye from office early last year. Previously the Korea Customs Service said it would cancel Lotte Group’s license if the chairman is convicted of bribery charges.